You should now think twice before you buy your pension annuity. Those people coming up to retirement and those pensioners of 70 plus approaching the age of 75, the cut off age beyond which they are obliged to purchase an annuity, would do well to hang on a while if they possibly can.
It might mean deferring retirement for some individuals but experts are now suggesting that there is every chance that annuity rates will improve somewhat over the next couple of years. This is all based on the government’s admission that it will need to borrow somewhere around £220 billon to balance the books in the current year; a move that has thrown the gilt and currency markets into a mild panic. The upshot is likely to be a big jump in gilt yields as institutions, in particular foreign investors, demand a higher return for the risks they take in holding Sterling.
Government stocks or gilts actually determine the rate paid by annuities and if gilt yields rise as expected, annuity rates will also improve. Annuity rates have fallen a fair bit over the past few months as the returns reacted to the big cuts in the Bank Base Rate (BBR) which brought BBR down from 5% in April, 2008, to today’s level of just 0.5%.
Gilt yields did jump in reaction to the Budget and although experts have been predicting a long-term downward trend in annuity rates, it is actually a much harder call today. The quantitative easing (QE) programme has put some downward pressure on gilt yields but on the other hand the government has got to sell an awful lot of debt on which it will have to offer more attractive rates. It is difficult to make a firm call on how annuity quotes will look in the near future, especially looking at how quickly sentiment turned from concern about inflation to deep worry about deflation. However, there are some good reasons why annuity rates could rise.
Matt Trott, head of annuities LV=, makes a similar statement suggesting that the government’s issue of £220 billion in extra gilts could definitely lead to volatility in pension annuity rates for some time to come.
Importantly, if you do need the income now, go ahead and buy an annuity, but you should make some provision for future inflation. One suggestion is that you consider splitting your annuity purchase into two with half in a level pension annuity and the other half in an index linked pension annuity.
